According to the June 2008 Case-Shiller Home Price Index, home prices in 15 of the 20 largest U.S. real estate markets either improved, or showed growth from the month prior.
This is the fourth straight month in which that happened which means that a national housing recovery may already be underway.
Now, it's worth stating that all real estate is local and that there's no such thing as a "national real estate market", but for home buyers looking to to maximize their negotiation power to get the best possible "deal", spotting trends like this before the media does is a good thing.
So far, only Bloomberg and a few others have chosen to highlight the positives from the otherwise-negative Case-Shiller report. By contrast, most publishers are focusing on annual home price figures which show a hefty drop of 15.9 percent.
We shouldn't dismiss annual trends because they're helpful in the theoretical sense, but for real, live home buyers trying to identify trends and market bottoms, it's the month-to-month data that matters most.
After looking at 4 consecutive months of Case-Shiller data, the month-to-month data appears to show that home prices have stabilized in most major markets. And, in some, they've already started to recover from their lows.
Source
U.S. House-Price Slide Eases, S&P/Case-Shiller Shows
Courtney Schlisserman
Bloomberg.com, August 26, 2008
When a homeowner buys a new home, he has 3 options of what to do with his current residence:
- Sell the home, paying off the mortgage in full
- Keep the home as a second/vacation home
- Convert the home to an investment property
The most common action plan is the first one -- sell the home and pay off the mortgage. However, with home prices poised to rebound, some savvy homeowners are trying to avoid "selling low".
Unfortunately -- as of August 1, 2008 -- waiting out the market won't be so easy.
Burned by foreclosures and wary of risk, Fannie Mae issued new conforming mortgage guidelines that specifically apply to home buyers planning to convert an existing primary residence into a second home or investment property.
Among the highlights of Fannie Mae's changes:
Selling the primary residence
If the new home being purchased closes prior to the existing home's sale, both payments must be used to qualify the buyer for the new mortgage.
Converting to a second home
If the home has less than 30 percent equity in it, the home buyer must show 6 months of PITI reserves for both properties to qualify for the new mortgage.
Converting to an investment property
If the home has less than 30 percent equity, its rental income may not be used to help the buyer qualify for the new mortgage.
If it seems like mortgage rules are getting strict, that's because they are. And they're expected to get tougher, too. With each foreclosure and high-profile bank collapse, mortgage lenders tighten up their guidelines just a bit, freezing out the "fringe" borrower from access to mortgage money.
Mortgage rates may rise through 2009, or they may fall. We don't know. But what we do know is that borrowing money to buy a home will be tougher.
If you plan to buy a home in the next 12 months, consider moving up your timeframe or -- at least -- planning ahead. Understanding the mortgage rules and how they can change may be the difference between getting approved for a home loan, or getting turned down.
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Momentum carried mortgage markets through a week of low trading volume and few economic releases. Rates were volatile, but ended the week unchanged overall.
Don't let the word "unchanged" fool you, however.
From day-to-day last week, mortgage rates covered a huge range and it was only coincidence that Friday ended where Monday began.
And it's the second week in a row that that happened.
Lately, mortgage rates have been highly sensitive to both inflation data and to the U.S. dollar. Lucky for rate shoppers, both were given a boost of support last week by high-profile Americans:
- Ben Bernanke said that inflation should moderate in 2009
- Warren Buffett said that he has no bets against the U.S. dollar
Comments from both of these men attracted buyers to the mortgage market, propping up prices and offsetting those that fled because of lingering trouble at Fannie Mac and Freddie Mac and skyrocketing wholesale prices.
But, for Americans in need of a home loan, know this: As long as there is uncertainty about the U.S. economy, mortgage rate volatility will continue.
And, this week, volatility will get an extra boost because of Labor Day.
Starting mid-day Thursday, trading volume will start to thin and will lead to larger-than-normal movements in mortgage bond pricing. This should cause fits for mortgage rate shoppers because rates will jump heading into weekend.
If you're currently comparing lenders, consider getting your rate locked in early in the week instead.
Stories on TV about the national real estate market are misleading to Americans.
This is because there is no such thing as a "national real estate market".
Consider the latest American Housing Survey. It found that there are 124,377,000 homes in America spread across:
- 50 states, with
- More than 30,000 incorporated cities, and with
- An innumerable number of neighborhoods
And yet, the media repeatedly groups all 124 million homes into one giant lump and then gives an analysis. No matter how you slice and dice the data, a home in Oregon can't be compared to a home in Mississippi.
This is why national real estate statistics are somewhat useless.
To get real estate analysis that matters, look local instead. And I don't mean stats from your state -- I mean stats from your neighborhood. It's the only way to know what's driving home prices on your street.
Unfortunately, finding local data like this isn't easy; it's far too narrow to be covered by the press. So, the best place to get local real estate data is from a local real estate agent or from somebody else with access to raw real estate data in and around your neighborhood.
By talking to "in the market" professionals that know your backyard, you'll get a much clearer picture of your local market -- good or bad -- than the national media could ever provide.
Real estate is a local market so your real estate data should be local, too.
Private Mortgage Insurance (PMI) is an insurance policy paid to a lender in the event that a homeowner defaults on his home loan.
With the growing number of mortgage defaults nationwide, mortgage insurers are finding their balance sheets under attack and their revenues in the red.
So far this year, mortgage insurers have paid out $6 billion in claims.
In response to the losses, the mortgage insurance industry is using two tactics to return to profitability -- and both mean bad news for homeowners.
- Raise the minimum standards to get insurance
- Raise the annual mortgage insurance cost
This is very similar to what Fannie Mae and Freddie Mac are doing to shore up their respective balance sheets; lending to only the most credit worthy, and making sure to charge them for their commensurate risk.
Because of the higher PMI rates, it's getting more expensive for small-downpayment home buyers to finance their homes. And that's if they can even still get mortgage insurance.
Some mortgage insurers now require a 10 percent minimum downpayment in certain states.
So with the number of mortgage defaults expected to rise through 2009, qualifying for PMI should get more expensive and more difficult. If you plan to make a small downpayment on your next home -- or plan to remortgage your current low equity home -- consider moving up your timeframe.
It may not be as cheap or as easy to get financing as it is today.
(Image courtesy: The Wall Street Journal)
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The Producer Price Index is a business inflation meter and it's now up 9.8 percent annually.
This is a huge number for PPI and represents the highest year-over-year rate of inflation since 1981.
Normally, blowout inflation like this would be terrible for mortgage rates but mortgage markets are actually improved since Tuesday's data release.
Usually, a rocketing PPI would create an inflation expectation on Wall Street which would, in turn, cause mortgage rates to rise.
Yesterday, however, that's not what happened.
Upon the PPI release, Wall Street looked at the 9.8 percent number and simply shrugged it off. "Of course PPI is high," traders thought. "Did you see how high energy costs were last month?"
Traders know that in July, oil prices reached an all-time high of $147.27 per barrel and, since then, crude is down more than 20 percent. Because of this, Wall Street has now turned its attention to the August PPI data, thinking it will much more calm than July's.
In other words, instead of fearing inflation, traders believe the worst of it is over, providing an unexpected boost to home buyers in need of mortgages. As inflation expectations fall, mortgage rates are following suit.
Housing Starts measure the number of new housing "units" on which construction has started and in July, Housing Starts fell to its lowest levels since March 1991.
For homeowners, this is a welcome bit of good news because as fewer homes are built, there is less inventory from which home buyers can choose.
With fewer homes for sale, the supply-and-demand curve shifts in favor of home sellers and this adds a support floor for home prices.
For home buyers, though -- and for the opposite reason -- the low number of Housing Starts may not be as welcome.
With fewer new homes on the market, owners of "used" homes may feel less pressure to lower their asking prices or to make other concessions to interested buyers. This means that home buyers may pay more for a home, or get fewer "throw-ins" on the contract.
For all of the hocus-pocus that surrounds real estate data, in the end, home prices are based on the supply of homes versus the demand for homes. When supply outpaces demand, home prices fall.
Homebuilders learned this lesson and July's Housing Starts data supports that.
(Image Courtesy: Wall Street Journal Online)
Mortgage rates overcame a terrible Monday last week, climbing back to unchanged by Friday. And like most weeks this year, rates were volatile.
Most interesting about last week, though, was that there was a ton of news that should have dragged mortgage rates down, but it didn't seem to happen.
Instead, a soaring U.S. dollar attracted global funds to Wall Street and a renewed demand for all things denominated in U.S. dollars, helping drive up prices in the mortgage bond market.
When mortgage bond prices move higher, mortgage rates move lower.
Like last week, the path of the dollar will likely determine in which direction mortgage rates move between today and Friday. If the dollar increases in value, mortgage rates should fall. And conversely, if the dollar decreases in value, mortgage rates should rise.
Of all the economic data hitting the wires this week, the only one of major importance is the Producer Price Index -- a "Cost of Living" reading for American businesses.
Normally, we'd pay attention to the inflation-predicting PPI because inflation causes mortgage rates to rise. This month, however, we're ignoring it. Oil prices have fallen 20-plus percent since July highs and the PPI reading from last month doesn't reflect the "current marketplace".
So, in the absence of hard data, mortgage rates should move with momentum this week. To follow along at home, keep your eyes on Bloomberg and stay close to your loan officer.
It's during weeks like this that rates can really move.
(Image courtesy: The Wall Street Journal Online)
Each month, the National Association of Realtors® releases a study called the Existing Home Sales report. It's a detailed look at "used" home sales data from all four regions of the country.
One of the key findings in each Existing Home Sales report is something called the "median sales price", the statistical price point at which half of the homes in the U.S. sold for more, and half sold for less.
Last month, the median sales price in the United States fell to $215,100, off 6.1 percent from a year ago.
But, just because the median sales price is falling doesn't mean that housing is necessarily in the doldrums. Real estate is tied to local markets and the national statistics rarely make sense when applied to any given city.
For example, the $215,100 median sales price for the nation is as outrageously inappropriate as a sales price to New York City as it is to Minot, North Dakota. In fact, it's the very definition of "median" that discounts its ability to reflect the health of the national housing market.
If large numbers of homes are sold and the price tags are high, the median sales price will trend higher. Conversely, if large numbers of homes are sold and the price tags are low, the median sales price will trend lower.
The median is just the middle point.
The falling median home sales price in June may indicative of first-time home buyers outnumbering luxury ones, or banks successfully unloading homes in foreclosure. And this idea may be supported by the data which shows that the West and Northeast led the decline.
So if you're trying to gauge the health of your local real estate market, consider asking a local real estate agent for help. A skilled agent's analysis will be infinitely more practical and useful than the national data pumped out by the industry trade group.
(Image courtesy: The Wall Street Journal Online)
The connection between the world's political events and mortgage rates here at home is not always clear, but Russia's invasion of Georgia provides a strong working lesson.
Georgia is a former Soviet republic on the eastern shores of the Black Sea. Oil pipelines within its territory supply about 1 percent of the world's daily oil needs, mostly to ports in Western Europe.
Last week, Russia bombed Georgia's oil and natural gas transport systems. None of the bombs struck the pipelines, but several exploded close to it. Pipeline part-owner BP shut down two of its oil lines as a precaution, but Russia is reported to have struck one of BP's other pipelines this morning.
The cost of oil is generally based on the normal economics of supply and demand so when oil supplies are threatened, damaged, or shutdown -- because of war, weather or otherwise -- oil prices respond by moving higher.
Higher oil prices, of course, are considered inflationary and that causes mortgage rates to rise here in the United States. High oil prices, for example, are one reason why mortgage rates spiked throughout June and July of this year. And as oil prices have settled, rates have calmed a bit, too.
It's easy to ignore politics and news when it's not happening in your own country, let alone your own hometown. But that doesn't make it any less important.
When you're buying a home, or thinking of refinancing one, you'll likely need a mortgage and the rate you pay on that mortgage will be influenced by every geopolitical event in the world.
Especially when the event involves oil.
Source
Russia-Georgia conflict raises worries over oil and gas pipelines
Elizabeth Douglass
Los Angeles Times, August 13, 2008
(Image courtesy: LA Times)
It's not your imagination -- getting approved for a home loan is becoming increasingly more difficult.
Taken from the Federal Reserve's quarterly survey of 84 banks, it illustrates the changing dynamic of mortgage guidelines.
Most notable is the steep curve for "prime" mortgages, a type of home loan given to applicants exhibiting:
- A well-documented credit history
- High credit scores
- Low debt-to-incomes
Americans have come to expect sub-prime loans to be tougher, but it's the sharp tightening of prime guidelines shows us that nobody is exempt from the newfound underwriting prudence that banks are exhibiting right now.
If you plan to buy or remortgage a home over the next year, consider a popular expression in financial circles -- the trend is your friend.
Know that mortgage guidelines will get tougher before they get easier and applicants on the cusp of being approved today will almost certainly be denied a mortgage three months down the road.
Owning real estate and making sound financial decisions requires a tremendous amount of advance planning and, sometimes, looking at the past is the best way to prepare for what's coming ahead.
According to the Federal Reserve's survey, what's coming ahead more mortgage application scrutiny.
When home sellers accepts a contract on MLS-listed property, the property's official status changes from "Active" to "Pending".
By measuring the number of "Pending" homes nationwide, the National Association of Realtors® publishes its once-monthly Pending Homes Sales Index.
The real estate industry group positions the report as a predictor of future home sales activity, stating that 80 percent of homes under contract will "close" within 60 days, and most others will close within 120 days.
But, although using the Pending Home Sales report as a crystal ball may be its intended use, it may not its best use.
This is because of the index's methodology:
- It doesn't measure new construction homes
- It doesn't track For Sale By Owner properties
- Its sample set covers just 20 percent of MLS transactions
In addition, in a tough mortgage climate such as the one we're in now, a greater percentage of pending sales will fail to close at all because of lack of financing.
The Pending Home Sales Index still has its place, however -- it's a terrific look at the buy-side demand for homes.
When the Pending Home Sales Index is rising, we can infer that more buyers in the market for homes and this is a signal of market strength. After all, pending sales can't happen unless there are buyers out there. And with more buyers competing for homes, home prices tend to rise.
This is why the June's Pending Home Sales report is so intriguing.
In June -- for the second time in three months -- the Pending Home Sales Index posted a large gain even as economists were calling for a loss. The inference here is that buyers are not only finding good value in all four regions of the country, but are willing to make bids on homes listed for sale.
Now, again, the uptick doesn't mean that the pending sales will necessarily close, but it does tell us that more home buyers are finding "now" to be a good time to buy real estate.
That sort of insight is what make the Pending Home Sales Index worth tracking. When buyer demand is rising, the real estate market isn't usually far behind.
In a week packed with mortgage news and economic data, mortgage rates swung hard in both directions last week before settling into the weekend slightly higher across the board.
Adjustable-rate mortgages worsened more than their fixed-rate counterparts and both broke a two-week streak in which mortgage rates had improved.
But, if we look at all of the big stories of last week, there was a dramatic overweight of news that is usually "good for rates".
Those stories included:
In the end, it turned out that the news was so good, investors decided to jump back into the stock market, propelling the Dow Jones 3.6 percent to a 6-week high. This fevered trading action drew investor money away from the bond market -- including bonds of the mortgage-backed variety -- and that pressured mortgage rates higher.
And, of course, it didn't help rates when the two biggest insurers of mortgage-backed debt posted large quarterly losses and warned of more delinquencies ahead.
Turning our attention to this week, make note that it is back-heavy on data. Therefore, expect the positive momentum of Thursday and Friday to carry through Monday and possibly Tuesday.
By Wednesday, however all bets are off -- that's when July's Retail Sales data is released. Furthermore, Retail Sales is backed up Thursday by the Consumer Price Index, a Cost of Living measurement.
Both data points are correlated with inflation so higher-than-expected readings may cause mortgage rates to rise.
Regardless, given that mortgage rates are now moving more in a hour than they used to in a day, be prepared to get your mortgage rate quotes quickly and be ready to act on them.
Just 90 minutes later, the quote could be expired.
(Image courtesy: Press of Atlantic City)
The next time you think you may have outgrown your home, consider what it would be like living in The Little House.
Barely bigger than a school bus, the 312-square-foot home featured by CTV News occupies land once reserved for a city alleyway. When the alley went unfinished, a contractor decided to buy and build on the lot.
The home is so small that an adult with outstretched arms can touch the opposite walls inside of it.
But, of all things little about The Little House, it's sale price is not one of them. Well-decorated and recently renovated, the home at 128 Day Avenue recently sold for the U.S.-equivalent of $159,300, or $511 per square foot.
Fannie Mae announced a new risk-based pricing model and additional mortgage delivery fees this week, adding to the cost of buying or refinancing a home.
Risk-based pricing was first introduced by Fannie Mae this past April. It added new, mandatory loan fees for high-risk borrowers while rewarding a small group of low-risk borrowers with fee credits.
In the updated model, even 720 credit scores with a 20 percent downpayment won't protect mortgage applicants from the risk-based fees and they can range as high as 2.750 percent, depending on credit scores and loan-to-value.
Fannie Mae will continue the practice of rewarding low-risk borrowers with fee credits.
Fannie Mae's second pricing change involves the Adverse Market Delivery Charge and it is not risk-based -- it applies to all applicants equally.
First introduced in December 2007, Adverse Market Delivery Charges are mandatory surcharges on all conforming mortgages. The fee was initially a quarter-percent. It's now doubled to 0.500 percent.
Combining risk-based pricing and delivery fees, mortgage applicants have two choices to pay them:
- As a one-time fee, paid at closing, payable to the lender
- As an interest rate increase, payable month-after-month to the lender
The one-time fee is calculated by multiplying to fee amount by the applicant's loan size and dividing by 100. The interest rate increase is calculated as a general rule, where each 0.500 percent in fees can be substituted for a 0.125 percent increase to a mortgage rate.
The fees become "official" October 1, 2008, but lenders are expected to deploy them much sooner.
For the second consecutive meeting, the Federal Open Market Committee left the Fed Funds Rate unchanged at 2.000 percent.
In its press release, the Federal Reserve addresses inflation, saying that it "has been high", fingering energy and commodity costs as culprits. The Fed does expects inflation to moderate later this year, however.
Regarding recession, the Fed addressed softening labor markets and tightening credit, and said that high energy prices may slow down economic activity in the months ahead.
The key comment, repeated from the June statement, was this:
Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth.
Translated, it reads:
The Federal Reserve expects that its policy changes to-date will help the markets find balance and order.
In other words, the Fed is biased towards a Fed Funds rate pause at its September 16, 2008, meeting barring new developments.
Stock markets are reacting favorably to the FOMC statement, bouncing higher after the 2:15 PM ET release. This movement is pulling money away from mortgage bonds and, as a result, rates are at their worst levels of the day.
Source
Parsing the Fed Statement
The Wall Street Journal Online
August 5, 2008
http://online.wsj.com/internal/mdc/info-fedparse0808.html
The Federal Open Market Committee meets today and is widely expected to hold the Federal Funds Rate at 2.000 percent.
This does not mean that mortgage rates will stay flat, too, however.
The Fed Funds Rate is a different type of interest rate from the ones charged to American homeowners for their mortgages.
The Fed Funds Rate is an interest rate paid for an overnight loan between banks; it's the shortest-of-short-term loans made to borrowers with exceedingly deep reserves.
By contrast, mortgage loans are borrowed over 30 years and are offered to borrowers of all credit types.
If the direction of the Fed Funds Rate and of mortgage rates were truly related, the chart above wouldn't show mortgage rates rising throughout the 12 months ending February 2008 while the Fed Funds Rate fell by 2.250 percent.
So, just because the Fed Funds Rate may remain on pause today doesn't mean that mortgage rates will, too. Mortgage rates are notoriously volatile post-Fed announcements.
Mortgage rate shoppers may be prudent to lock in ahead of Ben Bernanke and Company's 2:15 P.M. ET press release.
(Image courtesy: The Wall Street Journal Online)
In a week in which stock markets moved 1 percent or more on four separate days, mortgage markets displayed a relative calmness that helped pull rates lower.
It was the second consecutive week that mortgage rates improved.
Last week's biggest story came Monday when the housing bill was passed into law. The new law provides lifelines to the housing market's far-reaching corners including to homeowners, to lenders, and to mortgage-bond securitizers like Fannie Mae.
To the mortgage markets, the law adds stability to the system. Because the severity of losses is likely to reduce, mortgage debt is suddenly more attractive to global investors which includes pension funds, hedge funds, and other nations.
With fewer mortgage-related losses expected, demand for mortgage debt increased and that helped pressure mortgage rates lower.
There was other big news last week, too, and it came in the form of employment data.
For the seventh straight month, the economy lost jobs and it has now shed close to a half-million jobs so far this year -- a minuscule one-third-of-one-percent of the entire U.S. workforce.
Despite that smallness, though, unemployment among Americans is a trend worth watching.
When fewer Americans are working, fewer Americans are spending and that can slow down the U.S. economy. For now, this sort of mild slowdown appears to be leading mortgage rates lower but too many lost jobs could reverse the trend.
This week, there are two big events on the calendar -- Monday's Personal Spending and Personal Income figures, and Tuesday's Federal Open Market Committee meeting.
The Fed is widely expected to hold the Federal Funds Rate at 2.000 percent but -- as is always the case -- it's not what the Fed does, it's what the Fed says. If the Fed talks tough against inflation, expect mortgage rates to rise.
(Images courtesy: The Wall Street Journal Online)
Conforming mortgage guidelines are the Home Loan Rule Book, delineating between applicants that approved for a mortgage and those that do not.
Effective today, the rule book just got a little bit tougher.
According to Fannie Mae, homeowners converting their primary residence into a second home or investment property will be subject to additional underwriting scrutiny. Fannie Mae is leery of lending to people that may be over-extended.
The complete underwriting update is available at the Fannie Mae Web site but some of the more important points are summarized below, divided into Second Home and Investment Property.
Second Home Guideline Changes
- Without 30 percent equity in the second home, mortgage applicants must have 6 months worth of PITI reserves for both properties in their bank accounts.
- With 30 percent equity, the PITI reserve can be reduced to 2 months.
Previously, there was no minimum reserve requirement.
Investment Property Guideline Changes
- With 30 percent equity in an investment property, 75% of the monthly rental income can be applied toward the applicant's monthly household income.
- Without 30 percent equity, rental income may not be applied to the applicant's monthly household income and 6 months PITI is required for both properties.
Previously, 75% of the rental income was allowable regardless of equity, and minimum reserve requirements were 2 months.
Even though just a small percentage of Americans own second homes or investment properties, the conforming mortgage guideline changes impacts homeowners everywhere.
This is because more restrictive guidlines lead to two separate, but concurrent, outcomes:
- The demand for homes reduces because fewer buyers qualify for mortgages
- The supply of homes increases because fewer sellers can refinance into more affordable home loan
Less demand and more supply places downward pressure on home prices.
Now, remember that mortgage guidelines continuously evolve and what's accurate as August 1, 2008, may not be accurate six months down the road. In other words, confirm what you're reading about mortgages online with your loan officer before making any real estate-related decisions.
Monday, President Bush signed the Housing and Economic Recovery Act of 2008 into law and the press jumped on the obvious storylines:
- First-time home buyers get a $7,500 purchase "credit"
- Conforming loan limits move to $625,000
- Delinquent homeowners get a lifeline from the FHA
- Local governments get federal money for buying and restoring foreclosed homes
However, tucked away on the last few pages of the text, in a section called "Revenue Offsets", there's an important tax implication. The new housing law changes the way in which capital gains exclusions are calculated on the sale of a residence.
Under the old system, a taxpayer was entitled up to $250,000/$500,000 of tax-free gains from the sale of a home if filing separately/jointly provided he lived in the residence for at least 2 of the preceding 5 calendar years.
Savvy homeowners exploited this verbiage, moving from home-to-home every 2 years to avoid paying capital gains.
The new law thwarts this tactic.
Capital gains exclusions are now calculated by taking the capital gains on the sale of the home and multiplying it by a ratio of how long a person has lived in a home, by how long that person owned the home.
In the example above, a person living in a home for 2 of 5 years would be entitled to 40 percent of tax-free gains on a home sale instead of all of it. As always, however, it's best to talk with a qualified accountant about how tax code changes may impact you personally.
The new capital gains rules go into effect starting January 1, 2009.
